HONG KONG (Reuters) - Foreign investors are buying up Thai funds at their fastest pace in more than five years, lured by ample returns from an ascendant currency and extending the life of a share price rally in what was Southeast Asia's best performing market last year.

Thai-focused offshore equity funds raised $550 million in February, their highest net monthly inflow since July 2007, data from fund tracker Lipper, a Thomson Reuters company, showed. EPFR, another tracker, said the influx continued this month with Thai equity funds attracting money in the week to March 20.

Signs are that the currency - which last week hit its highest against the dollar since the 1997 financial crisis - will continue to climb, spurred by the economy's improving prospects. This will bring overseas investors a foreign exchange windfall when they convert into dollars their profits from an already rising stock market.

"The markets have done well and people are realising the potential of what is here, the good companies that can be picked here," said Adithep Vanabriksha, chief investment officer for Aberdeen Asset Management Company in Thailand, who oversees the best performing Thai fund with a return of more than 1,300 percent over the last 15 years.

The foreign interest will help make last week's sharp market correction, which pushed Thailand's stock index down 7.5 percent in its biggest weekly drop in more than four years, a brief blip in a prolonged climb. Indeed, in the first two days of this week the market has rebounded 4 percent.

An equity fund managed by Japan's Daiwa Asset Management collected nearly $300 million last month, the highest one-month haul by a Thai-dedicated equity fund in almost six years, Lipper data shows, as a 36 percent surge in Thai shares last year and 11 percent gain so far in 2013 attracted Japanese investors.

PREFERRED CHOICE

Thailand, part of Southeast Asia's combined economy of $2 trillion, has benefited from the region's increasing appeal as foreign investors seek growth and as China and India, Asia's economic powerhouses, lose steam.

Political stability and consumption-boosting government policies such as a minimum wage increase and corporate and personal income tax cuts are expected to spur growth, as will a bill approved by the Thai cabinet last week to borrow 2 trillion baht for long-term infrastructure projects.

These have helped to make Thailand the preferred destination for foreign investment in Southeast Asia.

While offshore equity funds focused on Indonesia and Malaysia have seen outflows worth about $477 million this year, investors have poured $929 million into Thai funds, nearly three times what they invested in all of 2012.

The country has also lured the region's top fund investors. Emerging market investor Mark Mobius has more than one-fourth of his $18 billion Templeton Asian Growth fund, the biggest in the region, invested in Thailand.

That compares with just a 3.6 percent weighting for Thailand in the MSCI AC Asia ex-Japan index. In fact, seven of the 10 biggest funds investing in the Asia ex-Japan region have allocations to Thailand that exceed its weight in the benchmark MSCI index, according to Lipper.

It's not just equities that are benefiting from the attention to Thailand.

Thai bonds have seen the heaviest foreign inflows on record at nearly $8 billion so far this year, more than four times the money flowing into Indonesian bonds, data from BNP Paribas and the Indonesian government website showed.

BAHT BOOST

A stronger baht, which has risen about 4 percent against the dollar this year and is playing catch-up with Southeast Asian currencies that rallied last year, has also boosted gains for foreigners.

Lipper data indicates that foreign fund investors on average reaped a 126 percentage point higher return over a 10-year period than domestic investors.

The Aberdeen New Thai Inv Tst Plc fund has returned more than 1,200 percent over the last 10 years while Thailand-based domestic equity funds have gained an average 535 percent, Lipper data shows. That means a $1,000 investment a decade ago in the Aberdeen fund would now be worth about $13,000, more than double the $6,350 value of an average Thai domestic stock fund.

The best performing domestic equity fund, the Bualuang Top-Ten, has returned 1,000 percent.

"All signs are good for the currency," said Ranodeb Roy, founder of hedge fund RV Capital Management.

"Thai baht has potential to rally further, helped by economic recovery post-flood, huge FDI flows, cheap stock market valuations as well as a cheap bond market after the sell off."

Key to investor confidence in the currency's continued rise is a hands-off policy at Thailand's relatively independent central bank, in contrast to policy makers elsewhere in Asia who are battling to thwart currency appreciation that could hobble export growth.

Share valuations remain cheaper than in neighbouring countries, at 13.7 times their forward 12-month earnings compared with 14.7 times in Indonesia and 16.8 times in the Philippines, according to data from Thomson Reuters StarMine.

Some investors have nevertheless grown cautious after Thailand's rapid rise, which pushed the MSCI Thailand index to a 20 percent premium over its 10-year median forward 12-month price-to-earnings ratio.

"Overall the macro looks attractive, but at the same time many stocks have moved well beyond their fair value, particularly in the retail sector," said Mark Fuchs, chief investment officer of hedge fund Fuchs Capital Partners.

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